The airline said a "major" incident was averted by the quick-thinking attendants on the flight Sunday from Kochi to Colombo.
Smoke was detected shortly after a meal service on the 70-minute flight, it said.
The smoke came from an overhead bin, the airline added, thanking its crew for "averting a major incident".
Crew suspected a lithium battery fire and put the luggage in water after failing to stop the smoke with a fire extinguisher, an airline statement said.
The airline did not give the make or model of the battery and the phones involved, but said an investigation was underway into the incident on the Airbus A330-200 aircraft. No one was hurt.
In October, the carrier joined other airlines in banning Samsung Note 7 phones from its flights fearing spontaneous combustion.